Token Brice, Polaris | Flipping USDC: Why Decentralized Stablecoins Need a New Collateral Thesis

So yeah, today I'm here to tell tell you about decentralized stablecoins through the lens of Polaris trying to highlight how this is critical problem for the space. It's actually connecting pretty well to the previous topic. We're going to talk about counterparty risk, trust minimization, and a lot of other cool things. So yeah, I am involved in Polaris rebuilding decentralized stablecoin infrastructure and we're going to be running you through the model today. But before we get to that, um there's actually tons of progress being made in terms of realizing we have a problem.

Because a few years ago, nobody really cared. Decentralized stablecoin were really niche and even the higher-ups, if we can call them like this, were not really taking the problem seriously enough. But recently Vitalik has started looking at the problem more uh more seriously and essentially called out the situation pretty well where he summarized those three main issues that need solving in order to build a credible, decentralized, and scalable stablecoin. And so the three are essentially first the USD dominance, the dollar dominance. So right now it's like 99% or something of the stablecoin are dollar pegged.

You have a bit of maybe 5 billion circulating of gold pegged stablecoin and 500 million of euro pegged stablecoin for a grand total of 310 billion dollar. So that gives you an idea of the proportion. Everything is a dwarf except dollar stablecoin. The second one is a big and long going one for decentralized stablecoin and it's the oracle problem. There's several approaches that have been experimented with here and are pretty interesting.

So, Liquity V1 has an Oracle switching logic. Protocols shipped like 5 years ago, so it was really good for back then. More recent protocols have interesting approaches like FX protocol is using a medianizer and that's a very credible way to approach the problem that is going to be harnessed in Polaris as well. Um, but yeah, the Oracle point is a pretty technical one. We're not going to be focusing too much about this one today.

Uh, the third one is also interesting and it's a question of providing a competition to staking, right? Cuz essentially, if you use ETH as collateral, then you're in face of a bit of a dilemma. Either you accept the staked ETH as collateral so that your user have maximal yield essentially. They don't have to forego the staking yield in order to use your protocol. But then you have a counterparty in your system and that makes it a bit hard to build a trust minimized stablecoin with with this assumption.

Or you don't take staked ETH, Rocket ETH, whatever staked ETH variant as collateral in your protocol, but then you have a situation where essentially user will start by default thinking, "Okay, so if I put my ETH here, I'm foregoing my 2.67% that it is right now of staking yield into your protocol." And so, how do you make up for that? So, that's essentially our scope. Uh, and as always, I'm long, so I'm going to speed up a bit, sorry.

So, quick quick situation on the stablecoin. Essentially, USDC, everybody's pretty aware of it, super centralized stablecoin, no surprise here. Where there is a bit of surprise is maybe the counterparty risk. Everybody love to forget about this one. On the USDC, we got an event 3 4 years ago to remind us about it, the SVD bank shortage.

USDC was actually trading at 90 cents or something for a whole weekend. So, people have to think, you know, USDC USDT, they are super sturdy, they will never fail. Well, USDC himself just failed a few years ago and will fail again in the future because it has massive amount of counterparties. Some of the those counterparties over a long enough time scale will eventually fail and maybe the system will survive, maybe not, maybe it will just be a temporary disturbance like we saw with SBB. But the risk is real and we cannot ignore it.

Uh there's been approach in the space to be on more or less decentralized stablecoin with MakerDAO, now Sky. Uh it started pretty clean with what we know called side that was only ETH-backed, but essentially every update of DAI introduced more counterparty risk and degrades the collateral even more. So, when they switch from side to DAI, they introduced a USDC dependency and a lot of other not so interesting things. And then when they switch to USDS from DAI, they introduced the possibility of having a blacklist and even more dirty collateral in terms of real world assets and so on. And the new kid on the block, the USDE, is a basis trade stablecoin, or so most people think because it did start like this, but it's essentially mostly um I like to call these a risk blank check stablecoin because it started as a basis trade stablecoin, but as the basis trade compressed, it switched to essentially being a real world asset wrapper and most of the holder are not even aware of it.

So, their risk exposure evolved completely over a few weeks and most of the user did not even realize when they used USDE, they signed a risk blank check. Um so, what we're building at Polaris is a full infrastructure to address all of these issue. It's built over three tokens uh, that are synergistic with one another and make the the core system. So, you have the PEs. We're going to go deep into this one.

That's the focus of our presentation. Uh, but that's essentially the collateral of the system. The system is then able to output different kind of stablecoin. We will focus on PUSD for simplicity. And there is the Polar token, which is our stewardship token.

So, stewardship will also detail that. It's somehow a bit like governance, but quite different because our system is immutable and massively constrained. So, the the the um, governance, which is called stewardship, cannot change as many things as it can on a die. And you cannot have an update that transform the system completely like we've seen on Maker. So, uh, this is probably the the most important part to understand.

The key innovation we found to be able to use ETH as a collateral in the system, have a yield that is competitive with a staking yield, and at the same time have an interesting asset in terms of what we can do with it for the CDP system, is using a bonding curve that you can see on screen. So, essentially users are coming in with their ETH. They are swapping against this bonding curve and they're getting PEs. Uh, the PEs is then the asset that is used as collateral in the system. And, uh, as we envision it to be used more broadly into DeFi.

Uh, this has a lot of advantages, uh, especially even compared to a stake ETH system because a bonding curve act as a permanent, always available liquidity provider. So, essentially the liquidity available on the PEs grows as the system grows, and there is no question of what if the liquidity provider don't provide liquidity anymore or, uh, withdrawing queue like you can have on the stake ETH. Um, Uh, one of the most interesting mechanism with this PEs is how it's designed with, uh, forever rising floor against ETH itself. And there is two main mechanism to feed this floor rising mechanism. So, the first one is pretty straightforward.

Every swap made against the bonding curve is charged a fee and this fee is used to raise the floor up. So, all the time as there is activity on that bonding curve, the floor simply goes up. So, this first mechanism. The second one uh is a pretty normal mechanism on the Polar token itself. So, essentially the only way to bring Polar token into existence is to burn PEs, which pushes the price up.

And it's an elegant way to connect Polar to the whole system because essentially the Polar token are brought into existence by performing the most synergistic action possible to the whole ecosystem. Um in terms of uh I was telling you about PEs is used as collateral in the in the CDP, but it goes beyond it. We see a life for PEs in DeFi because it's a product with competitive yield on ETH with different um risk and and compromises than unstaked ETH. And so, it makes for an attractive hold for any ETH bull essentially. And this table recaps to you the main difference, but they're mostly in terms of the liquidity because on staked ETH, you do have you know, liquidity on on Curve and other exchange on the wrapped staked ETH, but you are the mercy of liquidity provider, which can withdraw their liquidity if a crisis happen.

And then you're left with the exit queue that have a delay and other constraint. On PEs, you're swapping against the bonding curve and you have a predictable capacity in how much you can you you can swap. Uh the exposure itself is also different because uh PEs is not involved in validating the network in any way, so you don't have all the risk associated with that. Uh so, to go back to Vitalik's first point because we go beyond the dollar with Polaris, we are putting a whole infrastructure to output output any kind of stable. and uh we're going to build ourselves a Polaris team, the PUSD and the PGold, but we're going to make the model of the CDP model available to any relevant team to use and harness to output, for instance, PCHF or PEuros or the one we like to use as a joke but could happen probably is a PBigMac tracking the BigMac index.

Those are essentially synthetic assets. The infrastructure is able to handle any kind of debt asset as long as there is an oracle providing the price for it on chain. The infrastructure is flexible enough to even support negative interest rate. That's why we are envisioning a PCHF or PGold simply because the borrowers are incentivized and so depending of the specificities of each asset you might have negative borrowing rate. And just quickly on the stable themselves because this is also one of the key innovation of Polaris and how to stabilize and it's it's it's enabled by the bonding curve.

So essentially on the stable coin you have both a redemption mechanism similar to what you could have in a liquidity V1 or V2 but with his specificities but a completely novel mechanism which is the minting and it's essentially the inverse of a redemption. So if the stable coin is to be over pegged at some point an arbitrageur can trigger this minting function and it will mint stable coin against existing position in the system that can then be sold in the market to restore the price to its peg. The novelty of this is now that we have essentially on chain arbitrage action happening when the coin is under peg, that's a redemption, or over peg, that's a minting. So those the volume of those two activity can be used as a signal to achieve something that the whole space have been stumbling ahead against for years and never really succeeding, which is fully autonomous market-driven interest rate. So, on this slide I give you some overview of how it works for other system, but all the stable coin system either have manually defined interest rate by governance or very constrained user defined interest rate on liquidity V2 or other kind of constraint.

They're not able to dynamically adjust to the market conditions like we can see on on on this Polaris model. It's essentially a way to have an idea of the price of PUSD in the system without using an oracle. Uh do I have a bit more time to wrap up? Yeah? Okay.

Just quickly because this is also an important point. The vision we have for Polaris is we want to have a system where there are the strongest guarantees offered to the users. So, we were talking about the die you know USDs example where the system essentially degraded over time through the various update and the risk increased massively. It completely changed of nature from 5 years ago to what it is now. So, the stewardship is essentially our answer to address that.

The core of the system is immutable with parameters that can evolve within hardcoded range. And the periphery of the system has a bit more flexibility and the stewards, the holders of polar token, are the one who can govern those parameters. So, they they're essentially here to help the system fine-tune its prioritization to adjust to long-term trends, but the system itself self-stabilized and the stewards are, as the name would suggest, more stewards in terms of deciding which type of partners to onboard into the ecosystems and and decision like this that really requires any human touch, but the key core system function like the interest rate decision are fully automated. So, yeah, that's the call for Polaris and I think you will understand why it matters. It's a key time for tackling this problem cuz again, no the the space is dominated with centralized stablecoin all the risk that comes with it, seizing of asset, freezing of assets, sometimes even illegitimate freezing of assets.

Imagine if you wake up one morning and your 5,000 USDC are frozen by mistake, by Circle. Do you see yourself going after Circle and arguing your case so you get your assets unfrozen? I want to say good luck if that's your situation because it's probably a tough fight. Uh there are other concerns as well. We see issuer launching layer one, the plasma chain and so on for for Tezos.

And so, Polaris is is an answer of a lot of problem at once. It's essentially a massive ETH sink. It captures tons of ETH. It will capture tons of ETH into the bonding curve and use them as collateral to output trustless stable starting with pUSD and pGold, but essentially offering an infrastructure that anyone can harness to deliver stablecoin adapted to their local situation. So, if we have people here that are very keen on having a resilient counterparty free euro stablecoin, they could harness the infrastructure to do so.

Uh thank you all for your time. I don't know if I have time for question. No, I overlapped too much already. I'm sorry. You have QR code here you can scan for more info on Polaris or the Telegram channel for announcement.

And me and Lawrence right there, we are at the conference table summit for the next 2 days so you can catch us up. We'll be at ECC as well. So, if you have more questions, just run into us. I'm pretty easy to spot. Thank you for your time.

Have a good day.